Dollar Dives on Short-Covering and BIS Report

The US dollar appears to have lost modest ground against its primary currency rivals during short-covering at the end of last week’s trading. The Bank for International Settlements (BIS) released a statement on Sunday declaring that while European banks have lowered their reliance on dollar-based assets, there is still a strong need to diversify portfolios even further. The call for diversification is not new, but this study may add pressure on the USD which has seemingly been absent during this period of risk aversion.

Economic News

USD – US Dollar under Pressure Following BIS Study

The US dollar appears to have lost modest ground against its primary currency rivals during short-covering at the end of last week’s trading. By Friday’s closing hours the EUR/USD was trading above 1.21, and the USD/CAD was near 1.03. The market appears ready for a correction however, but few news events are expected today which may deliver the pressure needed for such a correction.

The Bank for International Settlements (BIS) released a statement on Sunday declaring that while European banks have lowered their reliance on dollar-based assets, there is still a strong need to diversify portfolios even further. The call for diversification is not new, but this study may add pressure to the USD which has seemingly been absent during this period of risk aversion.

Euro zone countries now worry that an over-reliance on the greenback could cause problems at a later date and are seeking other safe havens. The result should be a sell-off of USD in the forex market, which will no doubt help stabilize the European currencies and lift commodity prices somewhat.

In the meantime, today’s news events are on the light side. The only significant data will be the euro zone’s publication of its industrial production figures. While not typically carrying a heavy impact, they may be the only piece of data the market receives which could influence the majors.

EUR – Euro Benefits from French Risk Appetite and Weaker Dollar

The euro has apparently risen sharply following a period of short-covering and boosted risk appetite. A sudden surge in French risk seeking has helped the 16-nation single currency recover a moderate amount of its previous losses. The EUR rose significantly against both of its primary rivals, the USD and GBP.

Against the dollar, the euro temporarily traded above 1.22 before calming back down towards 1.21. The story was slightly different versus the British pound with a rapid rise from 0.8220 to 0.8350 since last Friday. The price of both pairs has appeared to stabilize as of this morning.

Adding weight to the euro’s recent climb for Monday morning was a report released by the Bank for International Settlements (BIS), which stated that the euro zone was in need of further diversification. While it did not bode well for the region itself, it adds pressure to the currencies which represent the largest rivalry against the euro. This in turn helps return a modicum of value back to the euro.

With the euro zone’s regional industrial production figures due today – and being the only significant report being released – the euro appears to be the headline currency of the forex market. Should these figures turn out positive, we should see some appreciation in the 16-nation single currency as risk appetite continues to grow.

JPY – Japanese Exports and Equities Higher, Yen Trading Lower

The Japanese yen has been on the decline for some time, but there seems to be an upside to this story for the Japanese economy. The decreased value of the JPY has helped lift Japanese exports, which has subsequently helped to temporarily lift Japanese equities. While a weaker currency often spells economic struggle, in the case of Japan it may represent the ability to return to high levels of growth.

The yen has seen significant losses versus a number of the major currencies. Versus the US dollar, the yen has fallen back towards 92.00, while the EUR has actually climbed towards 112.00. Even the British pound has made modest gains, ascending to 134.00 as of this morning. With no major news expected out of Japan today, it seems safe to assume that the present trends may continue throughout the day.

Crude Oil – Oil Prices Moving Erratically on Uncertainty

After peaking around $76 a barrel last week, the price of crude oil has appeared to stabilize near $74.50 as of this morning. The price of oil has continued to fluctuate in more volatile patterns recently due to the political uncertainty surrounding the BP oil spill in the Gulf of Mexico, as well as on the future of economic growth in the euro zone. Both the demand and supply side of the oil equation seem to be less certain and traders are witnessing larger price fluctuations as a result.

The price of oil does have a correlation with the value of the US dollar; therefore, we can make assumptions that crude oil may see an upward movement in the next few days simply because most expectations call for a decline in the USD. Any decrease in the value of the greenback typically results in a boost for oil. Traders should follow the news around the USD this week as it will likely decide the price movements for crude.

Technical News

EUR/USDThe Relative Strength Index on the 8-hour chart shows that the pair is currently trading well in overbought territory, which typically indicates a downward correction is likely to take place soon. This theory is supported by the Stochastic Slow on the 2-hour chart. Traders are advised to go short with tight stops today.GBP/USDPractically all technical indicators show the pair trading in neutral territory, with no clear direction on display. The one exception appears to be the Stochastic Slow on the 2-hour chart, which is showing a possible bearish correction occurring soon. Still, traders are advised to wait for a clear direction to show itself before entering into this pair today.USD/JPYTechnical indicators are showing signals that a bearish correction may take place for the pair today. The Bollinger Bands on the hourly chart, as well as the Relative Strength Index on the 4-hour chart lend support to this theory. Traders are advised to go short with tight stops in trading today.USD/CHFMost technical indicators are not showing a clear direction for USD/CHF at this point. With the pair currently trading in neutral territory, traders are advised to take a wait and see approach today, as a clearer indication may present itself later.

The Wild Card

EUR/JPYTechnical indicators across the board are showing this pair trading in overbought territory, indicating a bearish correction is likely to take place today. These include the Stochastic Slow and Relative Strength Index (RSI) on the 8-hour chart, as well as the RSI on the 4-hour chart. Forex traders are advised to go short with tight stops today.